Blackout Highlights Arcane Limits of Utility Firms

Bush team says taking away investment caps on big companies would lead to updates in power plants. Critics warn of Enron-like debacles.

WASHINGTON — For nearly 70 years, a Depression-era law has sharply limited big, multi-state utility companies from expanding or diversifying. But chances that the arcane law will remain on the books may have vanished with the lights that went out Aug. 14, the day of the Northeast blackout.

The Bush administration and industry officials contend that repealing the law would spur investment in power plants and modernize the electric grid. The law's repeal is expected to be a key part of the first overhaul of energy policy in a decade.

Although the debate over the Public Utility Holding Company Act has glazed many an eye on Capitol Hill, the outcome could reshape the energy industry, despite opposition by consumer groups that say it could lead to Enron-like debacles.

If the law is repealed, non-utility companies -- an oil firm, for example -- could buy up multi-state utilities. Large utility holding companies could enter new businesses -- purchase a movie studio, for instance. And a New York utility could buy power lines in California.

Getting rid of the law would "increase the number of companies that can invest in improving the infrastructure," said Sen. Mike Enzi (R-Wyo.), who supports repealing the law.

Opponents of repeal predict that it could lead to a wave of mergers, creating utility giants that could use their market dominance to raise electricity prices.

"The Western energy crises of 2000-01 were proof that the federal government must protect electric utility consumers and investors against corporate greed," said Joe Nipper, vice president of government relations for the American Public Power Assn., which represents more than 2,000 publicly owned electric utilities.

Lynn Hargis, a former assistant general counsel at the Federal Energy Regulatory Commission who is now at Public Citizen, a Washington-based consumer advocacy group, warned that the repeal would lead to an "over-concentration of economic power in the hands of a few companies."

President Franklin D. Roosevelt signed the legislation -- billed as one of the most significant pieces of New Deal business regulation -- in 1935 in response to abuses by utility holding empires in the 1920s and '30s.

The companies leveraged their utility subsidiaries to fund risky investments, costing investors tens of millions of dollars and sending dozens of utilities into bankruptcy.

Nipper expects the law to be repealed, noting that Congress and the White House are controlled by Republicans who generally support free markets.

"If we can get a comprehensive energy bill to the finish line, it's a virtual certainty that repeal [of the utility law] will be in it," agreed Jim Owen, a spokesman for the Edison Electric Institute, a utility trade group that has pushed for the change for years.

The energy bill, an administration priority, has gained urgency since last month's massive blackout. House and Senate negotiators are working to send Bush a compromise bill by the end of the month.

The legislation is expected to include a wide range of measures, from increasing the use of ethanol in the nation's gasoline supply to promoting construction of a pipeline to carry natural gas from Alaska to the Lower 48 states.

During a recent congressional hearing into the cause of the Northeast blackout, Bush administration and industry officials promoted repeal of the utility law as a critical step to spur investment in the nation's transmission system.

The grid is often described as a country road that needs to be transformed into an interstate highway to handle the increased traffic moving across it.

"The recent blackout, whatever its causes, reveals that the current system faces many stresses," said David K. Owens, Edison Electric Institute's executive vice president.

Proponents of repeal -- who include some Democrats -- contend the law discourages investment in the power system.

Earlier this year, David Sokol, chairman and chief executive of Iowa-based MidAmerican Energy Holdings Co., told Congress that his company's largest investor, Warren E. Buffett's Berkshire Hathaway Inc., wanted to invest $10 billion or more in the utility industry if the law is repealed.

Under the law, Buffett can invest in a utility that is predominantly in one state. But if he wants to invest in a multi-state utility, he probably would be forced to divest himself of his non-utility assets.

Repeal backers call the law obsolete, contending that state and other federal regulation of the industry has been strengthened since the 1930s to protect consumers and investors.

Currently, the law limits the operations of 28 multi-state utility parent companies that own about 140 electric and gas utilities; they include such companies as Exelon Corp., Southern Company Inc. and FirstEnergy Corp.

Companies that predominantly operate in one state and whose parent corporations are in the same state, such as California's Edison International and PG&E Corp., are exempt from the law.

Opponents of the repeal say that loosening government oversight of energy companies is the last thing that Congress should do after the collapse of the Houston-based Enron Corp. in 2001.

Enron used off-the-books partnerships to hide hundreds of millions of dollars in losses, causing its stock to plummet, costing investors billions of dollars and throwing thousands of Enron employees out of work.

If the law is repealed, consumer groups contend, multi-state utility companies could invest ratepayer money in risky schemes and hide debt, potentially leading to higher utility rates.

Carl Wood, a California public utilities commissioner, said that if the law is repealed, it would make it more difficult for state regulators to ensure that a company's electricity customers are not subsidizing the company's other business operations.

"Once you get these far-flung multi-state mergers, then the ability to oversee these things effectively slips away from state regulators," he said.